Understanding the Complexities of Mergers and Acquisitions

Mergers and acquisitions (M&A) are strategies for growth, market dominance, and diversification. While the fundamentals of M&A are consistent across industries, each sector presents unique challenges and opportunities.

Key Drivers of M&A Activity

M&A offers opportunities for companies to expand geographically, enhance their market share, or diversify into new services or products. The current M&A landscape is vibrant and is also being driven by factors like generational shifts in business ownership.

As baby boomers retire, they may not have younger relatives to pass their business to, or their heirs are not interested in taking the reins. In these situations, many seek to sell their businesses.

Types of Mergers and Acquisitions

The following are some common transactions that fall under the M&A umbrella:

1. Direct Merger

This involves the combination of two companies, resulting in a single surviving entity.

2. Consolidation

Here, two companies merge to form a completely new entity.

3. Stock Acquisition

One company acquires the stock of another, with both entities existing under a parent organization.

4. Asset Acquisition

Involves one company purchasing the assets of another, which often leads to the dissolution of the acquired company.

Tax and Financial Implications

There are numerous tax and financial implications when undertaking a merger or acquisition. How you structure the transaction can have various tax effects. Additionally, a valuation to determine the fair market value of your company’s assets and liabilities may be required.

Working with a trusted adviser will help ensure you have considered all avenues and understand the various ramifications.

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Other Issues

Be aware that other items (such as employee benefits, insurance rates, etc.) can also cause issues in M&A transactions.

For example, unemployment insurance (UI) rates can be affected through M&A based on whether a new entity is formed or if one entity acquires another in exchange for stock. In the former, the new parent company is assigned a tax rate based on the combined tax rate factors of each of the former owners/operators. In the latter, a new owner/operator who is already an employer keeps the unemployment insurance tax rate of its original business for the quarter in which the transfer took place.

Starting from the next calendar year after the transfer, the tax rate will be determined based on the combined rate factors of both businesses. A review of these other items can also help you decide how to best structure the transaction.

Additional Considerations

• Legal Compliance: Legal and compliance issues, like sales tax obligations, require thorough due diligence.
• Entity Types: The type of entities involved (e.g., S Corp, C Corp) significantly affects the M&A structuring and outcomes.

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The Importance of Early Professional Consultation

Engaging with M&A professionals early in the process is beneficial for strategic planning, exploring tax options, and structuring transactions.

Contact SVA as soon as possible when considering a merger or acquisition – we can help with deal structuring, due diligence, tax implications, and more. Our team can coordinate across all avenues to help you plan and execute a successful deal.